Corporations and Companies

Restraint of Trade Realities

Recently, Solomon Lew’s Just Group commenced action against departed CFO Nicole Peck. Just Group is seeking an injunction to prevent Ms Peck working for competitor, Cotton On, for a period of 24 months. Just Group is arguing that it is likely to suffer loss and damage as a result of the potential disclosure of confidential Ms Peck holds, to the Cotton On Group. Most likely, Just Group will be seeking to rely on some form of restraint of trade clause.

Restraint of trade clauses, often called non-competition clauses, are common. Essentially they are provisions in contracts designed to prevent a person from acting against the interests of another person once their mutual relationship ceases or changes. They are found in almost all contracts where the personal knowledge, skills, access to information or position of one party are important to the other. Common examples include employment contracts, business sale agreements and a range of arrangements between contractors, shareholders, partnerships, distributors, franchise systems and other commercial relationships.

Despite being common, restraint clauses skate on thin legal ice. By nature they are anti-competitive, which the law doesn’t like, so they face intense scrutiny before courts will order they be enforced. In the course of scrutinising, courts look at whether the clause is reasonably necessary in all the circumstances to protect the legitimate interests of the parties. What “is” and “isn’t” reasonably necessary depends heavily on the circumstances. Relevant factors that will usually be looked at include:

  • Whether the restrained person has specialised knowledge by reason of their relationship/position;
  • The nature and uniqueness of the position held by the restrained person;
  • The likely impact both locally and to the public if the clause is (or isn’t) enforced; and
  • The length of the restraint provision, the involvement the restrained person had in negotiating the clause and its overall reasonableness.

Practically, having to enforce a restraint a trade clause can be an expensive and unpleasant experience, particularly if the restrained person resists. It’s therefore vital that drafters get their clauses spot-on right from the beginning to ensure they have the best possible starting position moving forward. Some tips for approaching restraints include:

-  Be specific: Tailor the clause to the specific relationship rather than use a standard form template.

-   Consult: Allow the restrained person a chance to negotiate the clause and to seek legal advice on its effect.

-    Don’t overreach: Aim only for a level of protection that is reasonably necessary to protect your interests.

-    Think ahead: Consider the operational position you are likely to be in when the relationship ends and how this might impact the length and scope of the restraint needed (e.g. look at where your customers are located and what expiry/renewal dates apply).

-     Be fair: A five year, Australia-wide restraint on a casual employee working one day a week for minimal pay is going to struggle to survive at face value. Ensure proportionality between the scope of the restraint and the position/remuneration of the affected person.

The above is not an exhaustive list of must-dos. Restraint clauses must be approached on a case-by-case basis. Depending the location and context of the clause, specific and varying State and/or Federal laws may apply and each may impact the validity.